TMI Blog2001 (7) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... n the said firm. Both Shri Natvarlal and Shri Rajnikant were paid salary of Rs.15,000 per annum. For each of the assessment years the assessee-firm thus claimed a deduction of Rs.30,000 from its taxable income. The Income-tax Officer disallowed the said claim on the ground that day to day management of the business did not require any special skill or labour and further that as per the provisions of the Indian Partnership Act, the partners were obliged to work for the firm unless they were specifically taken as dormant partners. The Income-tax Officer thus disallowed the amount of Rs.30,000 for each of the years under reference by invoking section 40(b) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act"). The Commissioner of Income-tax (Appeals) held that Shri Natvarlal and Shri Rajnikant are not partners of the assessee-firm in their individual capacity and that both of them possess necessary knowledge and skill for running a cinema hall (which was the business carried on by the firm), and thus the payment made to them in their individual capacity could not be disallowed under section 40(b) of the Act. It was further held by the Commissioner of Income-tax (Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licting views are rendered by the Supreme Court. It was the submission of Mr. Shah that the dual capacity of a person was judicially recognised and that too by the Supreme Court in the context of applicability or otherwise of the provisions of section 40(b) of the Act. It was submitted that once this legal position was accepted it was not possible to take any other view in the matter while deciding the question with which this court is required to deal. Apart from the aforesaid decisions of the apex court, a decision of the Full Bench of this court was referred to and relied upon by the learned advocate for the assessee. He referred to the decision in the case of Chhotalal and Co. v. CIT [1984] 150 ITR 276 (Guj) [FB]. Mr. Shah read extensively from the observations at page 285 of the said decision which are to the following effect: "The Revenue is not precluded from looking into the real character of the partner and the capacity in which he represents himself in the partnership firm. If that be so, for the purpose of section 40(b) the Income-tax Act, 1961, is the Revenue to take note of the representative character of the assessee and make disallowance falling within the section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch. If the income-tax authorities are to act on the basis of real facts and not on any assumptions, then, for the purpose of section 40(b), they will have to consider the HUF as represented by Shri C. S. Virani as the partner and if that is so, what is paid to Shri C. S. Virani as representing HUF by way of interest will alone fall within the section". Mr. Nayak, the learned advocate for the Revenue, submitted that the decisions referred to and relied upon by Mr. Shah for the assessee pertained to payment of interest, and hence, are not applicable to the case where the payment was of salary. He referred to and relied upon the apex court decision in the case of Rashik Lal and Co. [1998] 229 ITR 458 and submitted that the said decision gives a complete answer and urged that the Tribunal's order should not be disturbed. As stated hereinbefore, the question referred to us is no longer res integra and it would not have been necessary for us to deal with the matter in detail but for the decisions of the apex court, on which a great stress was laid on behalf of the assessee to contend that the controversy should be decided in favour of the assessee on the basis of the ratio laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature enumerated, to any partner of the firm. Explanation 2 which has been added clarifies that interest paid by the firm to an individual who is a partner in a firm in a representative capacity shall not be taken into account for the purpose of the said clause. The wording of the provisions of section 40(b) clearly indicates that they are intended to cover all the payments of the nature described to a partner of the firm by the firm and do not indicate that only such payments as are made to a partner in his capacity as a partner and not other payments made to such partner are covered by the said provision. There is nothing in the said provision to indicate that any category of salary, remuneration, etc., though paid by a firm to a person who is a partner were to fall outside the scope of the above provision. The provisions of sections 12 and 13 of the Indian Partnership Act which deal with relations of partners to one another, inter alia, provide that subject to contract between the partners, each partner is bound to attend diligently to his duties in the conduct of the business and a partner is not entitled to receive remuneration for taking part in the conduct of the business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally as by the year, month, or other fixed period, in contrast to wages which are normally based on an hourly rate." Thus, all the three terms carry the same basic meaning, i.e., to compensate or reward a person for services rendered. The question that would then arise is: what is the distinction when employment of funds is compensated by payment of interest and compensation as aforesaid vis-a-vis services rendered. Under the Income-tax Act, 'firm", 'partner" and "partnership" have been given the same meaning as assigned to them in the Partnership Act. But the expression "partner" has been extended to include any person who, being minor, has been admitted to the benefits of a partnership. For the assessment years with which we are dealing the scheme of registration of firms would also throw light on the controversy. Section 184 of the Act specifically provides that: (i) the partnership must be evidenced by the instrument in writing, (ii) individual shares of partners must be specified in that instrument, and (iii) application for registration shall be signed by all the partners. Thus, it can be stated that when individual shares of partners have to be specified, such partners h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of the firm." "The scheme of the Act, eyeing it with special reference to sections 10(4)(b) and 16(1)(b), designates employee's salary as profit, where the servant is none other than a partner, i.e., co-owner of the business. If such be the rationale of the relevant provisions, the key to the solution of the problem is within easy reach. Salaries are profits known by a different name and must be treated as such for taxation purposes." In the case of Rashik Lal and Co. [1998] 229 ITR 458, the apex court has stated that the Hindu undivided family cannot be in a better position than a firm in the scheme of the Partnership Act. Referring to and relying upon one of the earliest decisions of this court in the case of Dulichand Laxminarayan v. CIT [1956] 29 ITR 535, it was stated that the reasons stated in the case of Duli chand [1956] 29 ITR 535 (SC), i. e., if a firm cannot join the partnership with another individual on similar lines a Hindu undivided family also cannot join a partnership with another individual. It is further stated that a Hindu undivided family being a fluctuating body of individuals cannot enter into a partnership with other individual partners. It canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would stand on a different footing in view of the fact that it is possible to trace the source of the funds. Therefore, the aspect of a partner having dual capacity i.e., one as a partner in a partnership firm and the other qua the interest of the person who is represented by such partner is recognised, because the question that could be posed and answered: interest is paid on which funds and who has invested those funds? Reliance placed on the Full Bench judgment in the case of Chhotalal and Co. [1984] 150 ITR 276 (Guj), on behalf of the assessee cannot carry the case of the assessee any further in light of what has been stated by the court at page 288. The Full Bench speaking through his Lordship P. S. Poti C. J., stated: 'We are not proposing to go into the decisions concerning payment of salary to a partner, for such payment stands on a footing different from the payment of interest. Payment of interest on amounts lent to the firm can be traced either to the individual or to the representative body by tracing the nature of the funds advanced, but not so labour by a partner. Whether he works in the firm and receives salary as an individual or as a representative of the fami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment'." Therefore, adopting the approach enunciated by the decision of Sun Engineering Works [1992] 198 ITR 297 (SC), it can be stated that the aforesaid conclusion in the case of Kanji Shivji and Co. [2000] 242 ITR 124 (SC), has to be read in the context of what is stated just prior thereto by the apex court when it held "In other words, the application of section 40(b) and the said Explanation was not really in issue in Rashik Lal's case [1998] 229 ITR 458 (SC). The observations in Rashik Lal's case [1998] 229 ITR 458 (SC) relating to the said Explanation must, therefore, be treated as obiter dicta." Therefore, the entire line of case law commencing from the case of Brij Mohan Das Laxman Das [1997] 223 ITR 825 (SC) and ending with the case of Kanji Shivji and CO. [2000] 242 ITR 124 (SC), shall hold the field as and when the question regarding payment of interest and its allowability or otherwise under section 40(b) of the Act arises in the case of assessment of partn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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